Current Development in Accounting Thoughts

Running head: CURRENT DEVELOPMENT IN ACCOUNTING THOUGHTS
Current Development in Accounting Thoughts
Name of the Student
Name of the University
Author’s Note

1CURRENT DEVELOPMENT IN ACCOUNTING THOUGHTS
Table of Contents
Answer to Question 1...................................................................................................2
Answer to Question 2...................................................................................................3
Answer to Question 3...................................................................................................5
References...................................................................................................................9

2CURRENT DEVELOPMENT IN ACCOUNTING THOUGHTS
Answer to Question 1
Historical Cost Accounting, also familiar as Conventional Accounting, helps in
recording accounting transactions in both income statement and balance sheet in the
monetary value that reflect their historical cost that is the prices at the time of
acquisition of these assets (Hwan Shin & Willis, 2014). According to the principles of
historical cost accounting, the firms are needed to maintain the accounting records at
the original transaction price and they are needed to retain these values throughout
the accounting process for serving as a basis for preparing the financial statements.
It implies that the historical cost accounting does not take into consideration the
recent changes in prices and values of these assets. There are major arguments on
the fact that accounting information under historical costing method faces issues of
relevance of time at the time of rising price. One cannot simply deny this fact as
there are certain aspects that lead to this issue in historical cost accounting.
In the recent economic environment, prices are rising at a constant basis and
it is the situation in most of the countries. In this situation, the historical cost
accounting suffers from certain limitations. Decrease in the value of money can be
seen at the time of inflation and thus, the used monetary unit for the measurement
standard does not have a constant value as the value shrinks due to the rise in
prices(Rahmawati, 2016). Under the historical cost accounting method, this decline
in the value of money is ignored and it continues adding transactions acquired at
different dates with money of fluctuating purchasing power. Thus, in the historical
cost accounting, the used monetary unit for measuring incomes and expenditures,
assets and liabilities, includes a combination of values reliant on the date of originally
buying or acquiring these items in the accounting books (Rahmawati, 2016).
Moreover, the historical cost accounting is based on the assumption of stable
monetary and the assumptions are I. No inflation is there and II. The inflation rate
can be ignored. These two key assumptions of historical cost accounting proves
false during the time of inflation due to the change in general purchasing power of
the monetary unit. This leads to major problem to measure and communicate the
outcome or results of business performance. At the same time, historical cost
accounting does not match the firm’s current revenues with the present operation
cost due to the fact that the firms measure the revenues in inflated dollars whereas

3CURRENT DEVELOPMENT IN ACCOUNTING THOUGHTS
the mixture of historical and current costs is there in production costs (Gynther,
2014).
For this reason, companies measure some costs in very old dollar such as
depreciation and other costs in the most recent dollars such as inventories, but still
there are many costs in the firms that reflect the recent prices such as wages, salary,
expenses and other current operating expenses. It implies that historical cost may
well vary significantly from the current cost whenever there is a presence of time lag
between acquisition and utilization. Accordingly, historical cost information is likely to
report inflated profit and lower cost of consuming stocks and fixed assets at the time
of increase in prices. This is the main problem in historical cost information at the
time of rising price (Gunawardhana&Gunawardana, 2014).
The presence of certain alternatives of historical cost accounting can be seen
and one of them is Fair Value Accounting. Under the fair value accounting, the use
of current market values can be seen as a basis to recognize the assets and
liabilities. As per the principles of fair value accounting, fair value should be derived
on the basis of the market conditions on the dare the measurement dare instead of
the transactions that took place some earlier date (Delkhosh et al., 2013). The
approach of fair value accounting eliminates the assumptions of historical cost
accounting. It implies that fair value accounting takes into consideration the effects of
inflation and it does not ignore the effects of inflation. For example, under the fair
value accounting, nominal cash flows including the effects of inflation should be
discounted at a rate that takes into consideration the effects of inflation and rise in
price. For this reason, the prices of assets and liabilities and income and expenses
considered in fair value accounting reflect the recent changes in prices for giving the
true picture of the company’s financial position (Nguyen, 2014). For these reasons, it
can be said that fair value accounting provides information that is of greater
relevance to the users of accounting.
Answer to Question 2
Conceptual Framework can be considered as the intention of IASB for the
development of high-quality accounting standards in order to enhance the
confidence of the accounting profession. The conceptual framework was needed to
bring the disclosures in shape between IASB and its other elements in order to